There are many definitions of SRI, usually involving words like sustainable, ethical and responsible but what is SRI?
A Scottish youth minister suggested their share of the £9m government fund to help those areas particularly hit by youth unemployment could be sustainable investment. Quite true. If the result is that thousands of young people find work who would not have if they didn't have access to this fund. We know the benefits of reduced unemployment, the ability to feed the local economies etc. Would it be as simple as that? Can you just throw money at unemployment and make it ok? Probably not so what's being sustained? And in any case, couldn't we say all government spending was socially responsible since it all contributes to the welfare of society?
Back in January a UN panel said that governments must look beyond the standard economic indicator GDP. In their view, sustainability is about reducing poverty and improving the quality of life for millions of people, not profit, and the financial crisis was (at least in part) caused by short termism and did not reward sustainable investment.
'Sustainability', it's used so often these days, in so many different contexts from tuna fishing to fossil fuel excavation but what does it mean in regard to investment? And what's the priority? Sustainability or a good return? Do you have to be able to afford to be sustainable?
Social conscious, value based, morals, ethical investing which considers social and environmental factors, surprisingly SRI has it's roots in religion, I remember the sanctions against South Africa and protests at Greenham Common, people chose not to be connected, even through investment, to organisations (or countries) who behaved in a way in which they did not approve. They voted with their feet. But in today's global economic society can we be sure that what we invest in is socially responsible?
The way in which SRI is defined makes it subjective, what's an important moral issue to me based on my values and traditions may not be to you. What to you is an undesirable activity may to me to perfectly acceptable. Divesting securities means to remove selected investments from a portfolio based on certain social or environmental criteria, nice idea but it's not without cost. Shareholder activism also falls under this governance function whereby shareholders can apply pressure to avoid such practices as exploitative overseas labour.
But is it more expensive to invest responsibly? I assumed so until I read that the Domini 400 Social Index, the first benchmark for equity portfolios subject to multiple social screen, set up in 1990 had outperformed the S&P 500 every year since it's inception.
Social responsibility is the principle that companies should contribute to the welfare of society and not be solely devoted to maximising profits, but it doesn't look like you have to choose?
Sources: FT, BBC News. investopedia.com
Sunday, 25 March 2012
Sunday, 18 March 2012
Would you credit it?
Prior to the credit crisis, we took Woolworths for granted, did any of us ever think that one day it would no longer be a fixture on our high streets? Today, Twiglets and Sarson's malt vinegar are for sale. Whatever next? Buckingham Palace with a 'for sale' sign outside? It's surprising how many companies rely on borrowing and when that borrowing either becomes too expensive, or just isn't available any more, it spells disaster.
The abundance of inexpensive credit following the bursting of the dot com bubble and the Twin Towers attack meant that we could all have what we wanted, when we wanted it. We were encouraged to borrow at low rates to get those items we'd only dreamed of. There's lots of ways an individual can get hold of credit, big purchases usually come with a finance option, provided you've got a good credit rating. Credit cards with low rates, or even 0% were all the rage. Not any more.
The abundance of inexpensive credit following the bursting of the dot com bubble and the Twin Towers attack meant that we could all have what we wanted, when we wanted it. We were encouraged to borrow at low rates to get those items we'd only dreamed of. There's lots of ways an individual can get hold of credit, big purchases usually come with a finance option, provided you've got a good credit rating. Credit cards with low rates, or even 0% were all the rage. Not any more.
For a company, credit rating depends on two things, the likelihood of the debt not being repaid (a default) and the extent to which the lender is protected in the event of a default. It's about level of risk, the higher risk the country, the lower the credit rating. The highest rating is AAA and this represents quality indicating the capacity to repay interest and principle is extremely strong. This week it's been reported Britain is in danger of losing its triple A status. Moodys and Fitch have put the rating on a 'negative outlook' while Greece's rating has improved to B-, Fitch's first uplift in rating since 2003.
Organisations who offer credit to their customers can buy insurance against the debt being unpaid. They can buy a policy which insures a percentage of the amount. Attitudes have changed, previously only certain customers, say those with a less than glowing reputation would be insured against, now in some companies it can be every customer. This type of practice oils the wheels of the economy and gives some protection against risk of default. It helps to ease the financial constipation which is unpleasant to say the least.
The wider implications of the credit crunch can be felt by many, we're all a bit more risk averse these days, if it can happen to Woolworths, it can happen to anyone.
Sources: FT, Arnold, BBC News website, business.financial post.com
Organisations who offer credit to their customers can buy insurance against the debt being unpaid. They can buy a policy which insures a percentage of the amount. Attitudes have changed, previously only certain customers, say those with a less than glowing reputation would be insured against, now in some companies it can be every customer. This type of practice oils the wheels of the economy and gives some protection against risk of default. It helps to ease the financial constipation which is unpleasant to say the least.
The wider implications of the credit crunch can be felt by many, we're all a bit more risk averse these days, if it can happen to Woolworths, it can happen to anyone.
Sources: FT, Arnold, BBC News website, business.financial post.com
Sunday, 11 March 2012
To buy (or merge), or not to buy (or merge)
There are many motivations for mergers or acquisitions and they certainly have an impact on share price, this week Alecto Minerals jumped 7.1% after completing the acquisition of Nubian Gold Exploration, an Ethiopian mining firm, International Power was lifted to its highest level in more than a year with the date approaching when GDF Suez can take full control. And yet it's an artificial change which can be as high as 30% but actually results in longer term shareholder wealth destruction.
It's been reported this week that Peugeot and General Motors (GM) are entering into a global alliance. With the specific aim of reducing costs and as long as the senior management can get along and the integrities of both companies remain intact, it should work well. It's neither a merger nor a full acquisitions, GM will own 7% of Peugeot and I think that in this case the right steps are being taken to increase shareholder wealth.
GM are strong in the global market, but not in Europe. Peugeot are weak in the world market but strong in Europe. Not rocket science is it? They've come together to create operating synergies (which will have the added benefit that they will reduce costs). Bringing the two companies together increases their buying power by combining their powers to achieve economies of scale. They're sharing some technical stuff too, platforms I think they call them but the cars will be different, they won't be the same car with different badges on as we've seen before with other manufacturers.
Both companies have had problems, Peugeot made a 500m Euros loss during the second half of 2011, it's Europe's largest car manufacturer and it relies on this market for its sales, but as we all know, the European market has been under pressure for some time. Peugeot have reduced their costs, improved their processes and diversified in an attempt to improve their financial position. GM were rescued from bankruptcy by the US government less than three years ago and rely on their strong performance in North and South America, Asia and China. That said it's quite an achievement for GM, they've turned things around showing the US were right to bail them out.
At the moment, production will stay with each individual company, I suppose it's a bit like an insurance policy, if things get tougher financially, they can pool production and close factories. It would be controversial, as would sharing top management but Nissan and Renault have done it and they've just reported further investment in at the Sunderland plant. And anyway, if it increases shareholder wealth, don't they have an obligation to consider it?
The only down side to this arrangement (excluding employee uncertainty) is from the perspective of the suppliers to the two car manufacturers. Because they're combining their buying power, will this put excess pressure on smaller firms to cut their prices? Could be a bit domineering and overbearing. Competition and bullying, it's a fine line.
There are so many benefits with this type of deal rather than an outright acquisition or a merger, they both get to keep their identities but have access to each other's markets, they're taking minimal risk but will reap the benefits from economies of scale, entry to new markets and increase their chances of survival. Only time will tell whether it works, it relies on shared vision, requires diplomacy, shared technical skills but most of all a desire to make it work.
Source: BBC News, FT, Arnold
It's been reported this week that Peugeot and General Motors (GM) are entering into a global alliance. With the specific aim of reducing costs and as long as the senior management can get along and the integrities of both companies remain intact, it should work well. It's neither a merger nor a full acquisitions, GM will own 7% of Peugeot and I think that in this case the right steps are being taken to increase shareholder wealth.
GM are strong in the global market, but not in Europe. Peugeot are weak in the world market but strong in Europe. Not rocket science is it? They've come together to create operating synergies (which will have the added benefit that they will reduce costs). Bringing the two companies together increases their buying power by combining their powers to achieve economies of scale. They're sharing some technical stuff too, platforms I think they call them but the cars will be different, they won't be the same car with different badges on as we've seen before with other manufacturers.
Both companies have had problems, Peugeot made a 500m Euros loss during the second half of 2011, it's Europe's largest car manufacturer and it relies on this market for its sales, but as we all know, the European market has been under pressure for some time. Peugeot have reduced their costs, improved their processes and diversified in an attempt to improve their financial position. GM were rescued from bankruptcy by the US government less than three years ago and rely on their strong performance in North and South America, Asia and China. That said it's quite an achievement for GM, they've turned things around showing the US were right to bail them out.
At the moment, production will stay with each individual company, I suppose it's a bit like an insurance policy, if things get tougher financially, they can pool production and close factories. It would be controversial, as would sharing top management but Nissan and Renault have done it and they've just reported further investment in at the Sunderland plant. And anyway, if it increases shareholder wealth, don't they have an obligation to consider it?
The only down side to this arrangement (excluding employee uncertainty) is from the perspective of the suppliers to the two car manufacturers. Because they're combining their buying power, will this put excess pressure on smaller firms to cut their prices? Could be a bit domineering and overbearing. Competition and bullying, it's a fine line.
There are so many benefits with this type of deal rather than an outright acquisition or a merger, they both get to keep their identities but have access to each other's markets, they're taking minimal risk but will reap the benefits from economies of scale, entry to new markets and increase their chances of survival. Only time will tell whether it works, it relies on shared vision, requires diplomacy, shared technical skills but most of all a desire to make it work.
Source: BBC News, FT, Arnold
Tuesday, 6 March 2012
Foreign Direct Investment
The interlinked nature of today's global economy means that what happens financially in one country can have consequences in many others. There are many key challenges for the economy, Christine Lagarde, Managing Director of the International Monetary Fund (IMF) identified the following three areas: sovereign debt, growth and instability. Growth needs to be just at the right rate too, not too fast, not too slow together with a balance of spending and cuts by governments, global output is predicted to be 3/4% lower during 2012 than 2011. In addition, the unemployment rates make some predict a 'lost generation'.
According to the 2011 World Investment Report (WIR 2011) foreign direct investment (FDI) has not bounced back to pre crisis levels, $1.24 trillion is still 15% down. Recovery is predicted though, but it will take two years (all being well). Once again developing and transition economies seem to be the ones to watch, half of all FDI is down to them and they generated record levels of outflows, directed mainly to other nations in the South, although FDI in the lowest developed countries fell and remains uneven. The importance of developing countries on the world economy isn't a new concept but these figures only highlight that there are positive aspects in today's economy, but probably away from the Eurozone. Demand from emerging markets is increasing,
It's not just the nations involved which are fresh and new and exciting, it's the way they get involved that's new and fresh and exciting. They're using new production and investment models to assist their integration into the global economic community and build their profile as not just players, but competitors. BAN Ki-moon says that their potential has to be unlocked and that frameworks are needed in order for developing countries to fully benefit.
The World Trade Organisation aims to help developing countries build their trade capacity, there are 153 members who negotiate changes to trade rules. The Doha round is the latest round of trade negotiations and its aim is to introduce lower trade barriers and revised trade rules, but progress is slow. The fundamental objective is to improve developing countries trade prospects. Director General Pascal Lamy said recently that if Europe wants to exit the current crisis it needs to have independent fiscal resources and focus on developing its competitive edge. Sounds like Europe is too risky, too interlinked financially and too expensive to me.
There have been uprisings in places like Syria and Greece because people are feeling the strain of social instability, high unemployment and austerity measures. There are arguments for focusing on the bottom of the pyramid, or those with a lower income, selling the lower priced goods to the biggest market. Sounds like developing markets to me. We've become a nation of high end consumers who would not know a good low cost product if we saw one. We're all about luxury and expense, does anyone reading this NOT have a smartphone? It's become the norm.
The more involved the emerging markets become in the global economy, the more organisations such as the ILM and WTO will impact upon them and in today's economic times, that may pose a risk in getting involved in crisis stricken countries. In addition the links between politicians and big business in developed countries almost puts developing markets at a disadvantage. If there was a recession in advanced markets, it would have a big impact on emerging markets, so called 'hot money' too can be damaging, flowing into and out of a country in the short term can damage their economy. If emerging markets are going to play what has become a developed countries game, there'll be winners and losers, who they are, only time will tell.
Sources World Investment Report 2008, 2011. World Trade Organisation. FT. Arnold
According to the 2011 World Investment Report (WIR 2011) foreign direct investment (FDI) has not bounced back to pre crisis levels, $1.24 trillion is still 15% down. Recovery is predicted though, but it will take two years (all being well). Once again developing and transition economies seem to be the ones to watch, half of all FDI is down to them and they generated record levels of outflows, directed mainly to other nations in the South, although FDI in the lowest developed countries fell and remains uneven. The importance of developing countries on the world economy isn't a new concept but these figures only highlight that there are positive aspects in today's economy, but probably away from the Eurozone. Demand from emerging markets is increasing,
It's not just the nations involved which are fresh and new and exciting, it's the way they get involved that's new and fresh and exciting. They're using new production and investment models to assist their integration into the global economic community and build their profile as not just players, but competitors. BAN Ki-moon says that their potential has to be unlocked and that frameworks are needed in order for developing countries to fully benefit.
The World Trade Organisation aims to help developing countries build their trade capacity, there are 153 members who negotiate changes to trade rules. The Doha round is the latest round of trade negotiations and its aim is to introduce lower trade barriers and revised trade rules, but progress is slow. The fundamental objective is to improve developing countries trade prospects. Director General Pascal Lamy said recently that if Europe wants to exit the current crisis it needs to have independent fiscal resources and focus on developing its competitive edge. Sounds like Europe is too risky, too interlinked financially and too expensive to me.
There have been uprisings in places like Syria and Greece because people are feeling the strain of social instability, high unemployment and austerity measures. There are arguments for focusing on the bottom of the pyramid, or those with a lower income, selling the lower priced goods to the biggest market. Sounds like developing markets to me. We've become a nation of high end consumers who would not know a good low cost product if we saw one. We're all about luxury and expense, does anyone reading this NOT have a smartphone? It's become the norm.
The more involved the emerging markets become in the global economy, the more organisations such as the ILM and WTO will impact upon them and in today's economic times, that may pose a risk in getting involved in crisis stricken countries. In addition the links between politicians and big business in developed countries almost puts developing markets at a disadvantage. If there was a recession in advanced markets, it would have a big impact on emerging markets, so called 'hot money' too can be damaging, flowing into and out of a country in the short term can damage their economy. If emerging markets are going to play what has become a developed countries game, there'll be winners and losers, who they are, only time will tell.
Sources World Investment Report 2008, 2011. World Trade Organisation. FT. Arnold
Monday, 27 February 2012
Exchange Rate Risks, Ethics and Tax Avoidance
On Thursday David Cameron talked about an anti-business culture developing in the UK with wealth creation being referred to as 'anti social'. With all of the discussion of senior executive pay, big business is feeling 'un-loved'. The fact of the matter is that the UK economy is reliant on multinationals, they may represent only 2% of British companies but they are responsible for 38% of British industrial employment, 23% of service sector employment and four fifths of all spending on research and development.
The UK is home to half of all multinationals headquartered in Europe who presumably are there to minimise the company's tax burden.
For a business, what does achieving the most efficient tax result mean? There are ethical pressures to pay tax at the appropriate rate, in the appropriate country, at the appropriate time but what about those of your competitors who don't? The result will be that they will have higher cash reserves, lower cost financing and increased dividends. Back to the ultimate business objective, Shareholder Wealth Maximisation. In this context, moving or allocating profits to a low tax jurisdiction, your shareholders may say was an obligation.
Certain things would have to happen in order to create a level playing field with regard to tax avoidance, international co-operation and transparency being just two of them. The Tax Justice Network (TJN) produce a Financial Secrecy Index which ranks companies according to their secrecy and the scale of their activities. The members have a shared concern that tax avoidance causes poverty.
The World Economic Forum in Davos in January this year shared that view too, Nick Mathiason from the Guardian came up with five steps to end global tax evasion. The discussion at the WEF was about using this funds, (avoided tax) by big businesses, which could be accessed if we all pulled together, and we could use it to beat austerity. What a good idea. I wonder why we aren't doing that now? Seems simple.
Could it be because recently we have seen that individuals too have ways of minimising tax payments.The current UK top rate of income tax is 50%. They pay themselves though private companies and save themselves thousands just like Moira Stewart from Radio 2, (well, I'm old) top NHS civil servants and the student loans chief Ed Lester. But, won't they be spending their (available) money in this country which generates more wealth? If the government (be it Cons/Labour/Lib) got it, what would they do with it? Instigate more public sector reforms which costs millions and ultimately fail or use it to pay benefits to those who don't deserve it?
The Guardian reported on 23rd February that a spokesman for the Her Majesty's Revenue and Customs (HMRC) task force, targeting those individuals who evade tax, say they have found evasion to be as high as 75% in the selected group. They're targeting people who own property abroad, fast food retailers and market stall holders, i.e. small businesses. Something tells me they're missing the point. Back to upsetting big business.
Another real issue for businesses who import or export goods is currency related risks. In an extreme example, the sanctions in Iran have caused the rial to fall drastically against foreign currency which has resulted in businesses not only being exposed but suffering transaction and economic risk. Iranian students studying in other countries are unable to receive currency from families, only the rial which is reducing in value every day. Sanctions have been placed on Iran because of their nuclear activity and in this case it's not just the businesses who are directly effected by the devaluation, it's all of the population.
During the last quarter of 2010, money spent by big business on investment was down but UK exports rose by 2.3%, that's good news but ultimately puts those exporters at risk, however these risks can and are managed. A forward contract may at least provide some guarantee of what future costs may be but benefits may not be derived if rates are favourable. Businesses could insist that all trade, whether that be import or export, be settled in their home currency, thereby avoiding the exchange rate risk. That risk is then passed on to the customer. Not necessarily risk free then - you'd have to be in a pretty good position to expect that of your customers, no competitors and so on.
Netting is another method where inter-organisational currency debts are settled for the net amount, taking into account the 'some you win, some you lose' attitude. Matching inflows and outflows and concentrating on the part of the trade which remains unmatched can work for some. Gambling (in an educated guessing kind of way) on what you expect the currency market to do is also an option adding in a borrowing factor just to make things really interesting.
There are many options to manage risks associated with currency exchange rates, the ultimate aim being that you (the management) aim for best value for the shareholder, but the tax question, that may not be so simple.
References: Hyrck and Andreoli (2005) Foreign Tax Strategies can be a boon to Multinationals. BBC news. Guardian news. FT. Arnold.
The UK is home to half of all multinationals headquartered in Europe who presumably are there to minimise the company's tax burden.
For a business, what does achieving the most efficient tax result mean? There are ethical pressures to pay tax at the appropriate rate, in the appropriate country, at the appropriate time but what about those of your competitors who don't? The result will be that they will have higher cash reserves, lower cost financing and increased dividends. Back to the ultimate business objective, Shareholder Wealth Maximisation. In this context, moving or allocating profits to a low tax jurisdiction, your shareholders may say was an obligation.
Certain things would have to happen in order to create a level playing field with regard to tax avoidance, international co-operation and transparency being just two of them. The Tax Justice Network (TJN) produce a Financial Secrecy Index which ranks companies according to their secrecy and the scale of their activities. The members have a shared concern that tax avoidance causes poverty.
The World Economic Forum in Davos in January this year shared that view too, Nick Mathiason from the Guardian came up with five steps to end global tax evasion. The discussion at the WEF was about using this funds, (avoided tax) by big businesses, which could be accessed if we all pulled together, and we could use it to beat austerity. What a good idea. I wonder why we aren't doing that now? Seems simple.
Could it be because recently we have seen that individuals too have ways of minimising tax payments.The current UK top rate of income tax is 50%. They pay themselves though private companies and save themselves thousands just like Moira Stewart from Radio 2, (well, I'm old) top NHS civil servants and the student loans chief Ed Lester. But, won't they be spending their (available) money in this country which generates more wealth? If the government (be it Cons/Labour/Lib) got it, what would they do with it? Instigate more public sector reforms which costs millions and ultimately fail or use it to pay benefits to those who don't deserve it?
The Guardian reported on 23rd February that a spokesman for the Her Majesty's Revenue and Customs (HMRC) task force, targeting those individuals who evade tax, say they have found evasion to be as high as 75% in the selected group. They're targeting people who own property abroad, fast food retailers and market stall holders, i.e. small businesses. Something tells me they're missing the point. Back to upsetting big business.
Another real issue for businesses who import or export goods is currency related risks. In an extreme example, the sanctions in Iran have caused the rial to fall drastically against foreign currency which has resulted in businesses not only being exposed but suffering transaction and economic risk. Iranian students studying in other countries are unable to receive currency from families, only the rial which is reducing in value every day. Sanctions have been placed on Iran because of their nuclear activity and in this case it's not just the businesses who are directly effected by the devaluation, it's all of the population.
During the last quarter of 2010, money spent by big business on investment was down but UK exports rose by 2.3%, that's good news but ultimately puts those exporters at risk, however these risks can and are managed. A forward contract may at least provide some guarantee of what future costs may be but benefits may not be derived if rates are favourable. Businesses could insist that all trade, whether that be import or export, be settled in their home currency, thereby avoiding the exchange rate risk. That risk is then passed on to the customer. Not necessarily risk free then - you'd have to be in a pretty good position to expect that of your customers, no competitors and so on.
Netting is another method where inter-organisational currency debts are settled for the net amount, taking into account the 'some you win, some you lose' attitude. Matching inflows and outflows and concentrating on the part of the trade which remains unmatched can work for some. Gambling (in an educated guessing kind of way) on what you expect the currency market to do is also an option adding in a borrowing factor just to make things really interesting.
There are many options to manage risks associated with currency exchange rates, the ultimate aim being that you (the management) aim for best value for the shareholder, but the tax question, that may not be so simple.
References: Hyrck and Andreoli (2005) Foreign Tax Strategies can be a boon to Multinationals. BBC news. Guardian news. FT. Arnold.
Tuesday, 21 February 2012
Raising Finance - so many options
When considering raising finance for new projects the main considerations for companies are availability and cost, or when can I get it and how much will it cost?
During the 'credit crunch' there was a shortage of credit, banks no longer wanted to lend. The banks hadn't been wise enough to keep a nest egg for those who hadn't been wise enough to keep a nest egg. Today, funds are directed from the Bank of England to high street banks with the specific purpose that it is loaned to businesses.
There was national surprise when established businesses such as Woolworths went bust. How could it be that such a well know town and city fixture was financially unstable? Everyday we read that some well known brand was struggling and in need of finance. The truth is that without finance, many businesses could not operate.
There are different types of finance available, a project may be funded internally using retained earnings, (or profits from last year,) but what if you didn't make a profit last year? Other finance options include Equity and Debt finance, or a mixture of both. Either way, investors expect a return on their investment.
Vodafone has recently been discussed in relation to an 'all cash' deal to buy Cable and Wireless. UPS are in talks to buy TNT Express, offering 9 Euros per share and although Anglo American ended the year with debts following the purchase of a stake in De Beers, they plan $7bn capital expenditure in 2012.
An initial float on the stock market is a lengthy process so would be associated with long term strategic intent rather than an opportunity the company couldn't miss. It involves sponsors, prospectuses and loss of control but brings with it no obligation to make regular payments - unless they want to pay dividends. If the company's shares are attractive to the market, this may be a good way to raise finance, either on a local market or globally. Issuing shares is costly but also helps to raise the profile of a company.
Debt finance may be a better (and probably less expensive) option for some companies, particularly those who prefer not to 'float', Phillip Green, Richard Branson, Mr JCB etc.There are many options available to businesses, not just bank loans, they can use bonds or even syndicated loans if the amount of borrowing is extremely large (£100m upwards). The major benefit of this type of borrowing is that there is no loss of control (provided you can make the repayments).
Dominos pizza company is a good example, they moved from the AIM to the main market in 2008, earnings per share and dividend per share have increased year on year by at least 24% over the last five years. The management have big plans and their investment has paid off. Currently they have a loan for £25m. Their business model includes being highly geared. Their gearing ratio has been as high as 73% (2009). The 2010 long term liabilities were £54m, total equity stood at £42m.
Dominos have had a programme of share buybacks which has generated artificial interest in the company and falsely inflated the share price. They chose to buy back shares rather than reduce their debt. Their manipulation of the stock market could be a viewed as beating the market, but is heavily reliant on a strong business model, they have used value enhancing methods very well and can cope with the associated risks. They chose to take out a loan rather than giving away any further control to shareholders and by using a less expensive form of debt, they have lowered their weighted average cost of capital. Very good.
During the 'credit crunch' there was a shortage of credit, banks no longer wanted to lend. The banks hadn't been wise enough to keep a nest egg for those who hadn't been wise enough to keep a nest egg. Today, funds are directed from the Bank of England to high street banks with the specific purpose that it is loaned to businesses.
There was national surprise when established businesses such as Woolworths went bust. How could it be that such a well know town and city fixture was financially unstable? Everyday we read that some well known brand was struggling and in need of finance. The truth is that without finance, many businesses could not operate.
There are different types of finance available, a project may be funded internally using retained earnings, (or profits from last year,) but what if you didn't make a profit last year? Other finance options include Equity and Debt finance, or a mixture of both. Either way, investors expect a return on their investment.
Vodafone has recently been discussed in relation to an 'all cash' deal to buy Cable and Wireless. UPS are in talks to buy TNT Express, offering 9 Euros per share and although Anglo American ended the year with debts following the purchase of a stake in De Beers, they plan $7bn capital expenditure in 2012.
An initial float on the stock market is a lengthy process so would be associated with long term strategic intent rather than an opportunity the company couldn't miss. It involves sponsors, prospectuses and loss of control but brings with it no obligation to make regular payments - unless they want to pay dividends. If the company's shares are attractive to the market, this may be a good way to raise finance, either on a local market or globally. Issuing shares is costly but also helps to raise the profile of a company.
Debt finance may be a better (and probably less expensive) option for some companies, particularly those who prefer not to 'float', Phillip Green, Richard Branson, Mr JCB etc.There are many options available to businesses, not just bank loans, they can use bonds or even syndicated loans if the amount of borrowing is extremely large (£100m upwards). The major benefit of this type of borrowing is that there is no loss of control (provided you can make the repayments).
Dominos pizza company is a good example, they moved from the AIM to the main market in 2008, earnings per share and dividend per share have increased year on year by at least 24% over the last five years. The management have big plans and their investment has paid off. Currently they have a loan for £25m. Their business model includes being highly geared. Their gearing ratio has been as high as 73% (2009). The 2010 long term liabilities were £54m, total equity stood at £42m.
Dominos have had a programme of share buybacks which has generated artificial interest in the company and falsely inflated the share price. They chose to buy back shares rather than reduce their debt. Their manipulation of the stock market could be a viewed as beating the market, but is heavily reliant on a strong business model, they have used value enhancing methods very well and can cope with the associated risks. They chose to take out a loan rather than giving away any further control to shareholders and by using a less expensive form of debt, they have lowered their weighted average cost of capital. Very good.
Sunday, 12 February 2012
Bonuses, can't live with them, can't live without them!
For seven years I was paid a salary plus bonus. The idea was that
the bonus was an incentive to make us do more. Did it? Yes. For weeks the news
has been dominated by discussions about Royal Bank of Scotland’s Chief
Executive Stephen Hester’s £963K bonus. Now the discussion has moved on to
Barclay's CEO Bob Diamond. Should he? Shouldn't he? Will he? Won't he?
In the business world it is accepted that if you don’t pay a
bonus, you won’t get quality individuals (i.e. men – but that’s another story)
to undertake such important roles. Hester’s salary for example is £1.2m; that
obviously doesn’t guarantee quality leadership. I thought it would. Chris
Roebuck of the London Business School said RBS had no choice, if they didn’t
award this level of bonus, Hester could ‘walk 50 yards across the street’ and
get another job somewhere else. He has this week discussed his 'deeply
depressing moments ' during the last three years. Hester turned down the bonus
and even considered leaving RBS. Surely not.
If shareholder wealth maximisation is the primary objective,
Stephen Hester has done his job and deserves his bonus, RBS is now making
money. Under the principles of Corporate Governance, incapable managers are
removed by capable ones. Based on his results, Hester can't be described as
'incapable'. Diamond on the other hand has given up his 2013 profit target in
favour of an 'in time' time scale, (which is no time scale) but will he be
awarded a bonus? Or more to the point, should he be awarded a bonus? Depends
what he was asked to do and if it was dependant on achieving 6.8% then no, he
shouldn't. He probably will, although it may be 25, 32 or 45% down.
In 2002 Charles Handy remarked that there is more to a
business than making a profit, the level of profit simply allows the business
to 'do something more or better' and the 'something' becomes the real
justification for the business.
Handy talked about the workforce being a community who all benefit
from the company doing well. He said that we should measure success in terms of
outcomes for others as well as ourselves. The outcome for Hester is good,
potentially, and for the shareholders too, RBS has made a profit under his
leadership. Is that the kind of community Handy meant. Sounds ok to me.
On Friday when Barclays announced that they had missed their 2011
profit expectations, Diamond took the focus to 'Citizenship'. No, they probably
weren't going to make their 2013 target but 'look at the other things we've
achieved' (I think was the general message) which would have been admirable had
they not included paying tax in one of their contributions to society. We all
pay tax, it's an obligation not a thing simply to 'help economies progress and
grow'.
Until this week, my opinion on share prices or 'the market' as it
is known, was that it (trading) was little more than gambling, some you win,
some you lose, certainly based on luck or something beyond my control going on
the in the Global economy. Now I've discovered that the market is actually
efficient so is there any point in trying to beat it? The standard finance
theory is that the market is efficient so don't try to beat it, the behavioural
financiers (or professionals) oppose this theory since it makes what they do
redundant. Rational/irrational? Normal/abnormal? Who's right and how would you
test? (Statman 1999)
Barclays share price closed yesterday at 234.05p, the day before
the news about the profits, it has closed at 233.1p. No over or under reaction
there then.
At the World Economic Forum in Davos a few weeks ago the issue of
inequality was repeatedly raised. The gap between the 'haves' and the 'have
nots' appears to be growing. Is it? Who knows? The constant reminder from the
media about higher costs and lower wages only serves to reinforce a picture of
bleakness where even people who achieve what they're employed to achieve
shouldn't be recognised in the (business) appropriate manner.
Only time will tell whether Hester stays with RBS to complete his
task and ensure the bank is sold at a good price and the UK taxpayers get their
dosh back, or indeed whether Barclays hits its 2013 targets and continues to
contribute to society by paying its tax.
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